Meme stocks? I'll pass.

These short-squeeze meme stocks have gotten out of control. You hear almost every day about someone who made a ton of money off of one of these stocks and will not have to work another day in their lives because of it. What you don't, or rarely, hear about is the people who bought at or near the top, sold at the bottom and lost their money. While these stocks might have good fundamentals (they usually don't, but the redditors will come up with every reason they can think of the validate their purchase) and often rebound after the initial "pump" later, these people have certainly gotten themselves one volatile position that they must hold for longer than usually was intended, and at terrible purchase price.

You could very well make a lot of money on collectively pumping a stock up high enough to stop out all the hedge funds and institutions, but at the same time, if something doesn't go to plan and the plan fails, the stock could just keep going down as it was before.

I am part of multiple Discord servers full of investors and also some traders. I find it insightful, interesting and often amusing to see the different types of investors and traders discussing and debating how to manage their portfolios. I often run into people, usually fairly young people, who argue that they are dabbling in meme stocks with just "fun money" and that it doesn't matter. Some of the worst is when I see 16-year-olds taking their entire $300 net worth and putting it all into meme stocks because "it's not going to impact my life in any way if I lose it". If you are young, I wouldn't treat it like you have nothing to lose. Money can be very useful to get started in life. Don't just brush off proper investing because you are young. The earlier you learn to invest properly, the more money you will have when you are older from compounding returns.

It's not Just Meme Stocks

It's other random strategies too. I once ran into someone in one of these chats that was sharing his insider trades swing trading strategy, that involved buying stocks that recently had large insider buys from people with lots of say in the company, like the CEO. This guy had grown his account up to somewhere around 1000% gains using this strategy. I said that was great, but then I asked him for the equity graph of his account (this is a must-see every time someone brings up one of these strategies, knowing what I know about back-testing trading strategies).

To my (un)surprise, his account was all the way back down to around 400% gains.That is still super impressive for a 6-month period, but too impressive for me to believe it was anything but luck. That means he had lost 60% of his prior profits! There is no sharpe ratio in that, that's for sure. The graph also looked like a pump-and-dump. It was not even a single stock. This was his entire portfolio made up of (he said) 70-80 trades using this strategy.

I immediately told him that this strategy is very unlikely to work in the long run. He of course disputed this and claimed "it does work, I know it will!", to which I then asked to see historical data to back up his claim. He said the data backing up his claim was that insiders have been known to beat the market consistently, and while that is true, that is referring to the insiders holdings in the long run (NOT price volatility within the period after the insiders buy shares). This guy was buying and holding for a week after the insider transactions, and that is not the same as the data, so it was not even a valid back-test. I wouldn't be surprised if he looked up that statistic right when I asked him, since it's the first one that pops up when you search "do insiders beat the market?" on any major search engine.

Fun Once in a While, but in the Long Term?

I have spent years analyzing the trading industry and trading strategies, and I have back-tested tons of them. I know a lot about how it all works, and I know that it's very unlikely that any of them will outperform the market in the long run, especially technical strategies. Back-test any strategy that you are even going to meme with because I don't care if it's "fun money" - you are almost 90% likely to lose it. Better to come into the game with statistics to back up what you are doing than to show up to the fight in your underwear.

I don't care the amount, why lose it if you can avoid losing it when you have such a high likelihood of losing it? You could buy tools, books, etc. with that money rather than gambling it away. But anyways, these people are usually pretty hard-set on these strategies, and usually do not understand the concept of back-testing (and if they do they usually are reluctant and lazy enough to not actually do it or care), so I let them be.

There is merit to risky plays if you are just doing one or two of them for fun. It's like buying a lottery ticket. But over time, if you do it over and over again, I guarantee you will eventually lose your money, or at least most of what you had made. For anything like these short squeeze stocks, they are, in their own way, sort of like pump-and-dumps. For all the people who make money on the way up, there are tons of people who bought at the top, and sold on the way down. Most of the people who make lots of money on those stocks are the ones who had large positions before any of the hype even started. I understand that there is the added capital that the large funds (that were short on the stock) add into the market that enables the retail investorsgamblers to take more from the market, but I am pretty sure that these hedge funds have figured out what is "up" and are not going to let themselves be taken out by some redditors who all of a sudden want to pick fun at them.

Don't end up like this guy:

If these types of strategies actually worked long-term, then people like Warren Buffet would be doing it. Everyone would be doing it, and nobody would work jobs because we could all just be rich off of meme stocks!!